Statutory Demands for Company Debts: How They Work

If a creditor is owed at least $2,000 by a company, a creditor has a few options to try and recover the debt. The first is to send a letter of demand (usually from a lawyer). If that doesn’t work, there is another option aside from issuing court proceedings, which is issuing what’s called a “statutory demand”.

Statutory Demands Generally

Issued under the Corporations Act, statutory demands are essentially a notice to the debtor company that it is required to pay the debt (which may include 2 or more debts), within 21 days or else it is presumed to be insolvent. Importantly, the debts cannot relate to contingent or prospective liabilities; so creditors should only issue a statutory demand when they are sure that there is no possibility of a dispute over whether the debtor in fact owes you the money.

Form of Statutory Demands

The statutory demand must be in the prescribed form under the Corporations Act and it must be signed by the creditor or on behalf of the creditor. The form is very particular and, if not completed properly, may give the debtor an argument to set it aside for being “defective”.

If the debt is not a judgment (i.e. it is a debt due to a Court order), then the statutory demand must have a supporting affidavit attached. Some issues that sometimes arise with the demand and supporting affidavits:

it is not in the prescribed form;

the supporting affidavit is not sworn correctly;

the form does not properly refer to the parties as “debtor” and “creditor”;

the affidavit is inaccurate or incomplete (e.g. it does not verify the debt that is owed);

the creditor has to be careful in setting out the debt and the manner in which interest is claimed, if there is any ambiguity whatsoever then the statutory demand might be “defective”;

if there are two or more debts, then care is required to ensure that each debt is identified and the total amount is also inserted into the statutory demand.

Once the demand and (if applicable) supporting affidavit have been finalised, the next step is to arrange for “service” on the debtor.

Serving Statutory Demands

The documents must be served by either:

leaving it at, or posting it to, the registered office of the debtor company; or

delivering a copy of the documents personally to a director of the company who resides in Australia.

An up-to-date company search with ASIC will reveal those details.

If the debtor does not take any action, the creditor will ultimately need to satisfy a Court that it properly served the debtor company; so evidence of the mode and time of service will be required.

Debtor’s Response

Once the debtor is served with the statutory demand, it has two options in response: either do nothing or make an application to the Court to set it aside.

The debtor can apply to set aside the statutory demand, but it must make an application to the Supreme Court within 21 days (without exception) of receiving the demand and must serve that application and supporting affidavit on the creditor.

If the debtor makes the application, it will have to prove to the Court that, more likely than not, it has a defence to the statutory demand. This is done by providing affidavits (sworn on oath) giving evidence to satisfy the Court that:

a ‘genuine dispute exists’’; or

it has a counter-claim or some other claim that can be off-set against the debt; or

a defect in the statutory demand would cause “substantial injustice” to the debtor; or

there is some other reason within the Court’s general discretion to set aside the demand.

All that is required in order to evidence a ‘genuine dispute’ is that the debtor has a ‘plausible contention requiring investigation’, but it cannot be ‘spurious, hypothetical, illusory or misconceived’ (i.e. not fanciful or far-fetched). As to defects, some examples are:

an irregularity;

a misstatement of an amount or total;

a misdescription of a debt or other matter; or

a misdescription of a person or entity.

This evidence must be provided by way of affidavit/s. Importantly, the supporting affidavit (which is filed in that 21 day period) must contain evidence of the grounds relied upon by the debtor to set aside the demand. There is no problem with supplementing the grounds later on with further affidavits (before the application), but if the debtor neglects to specify particular grounds in the 21 day period, the debtor might not be able to rely on such grounds when the application is heard.

If the debtor successfully argues to set aside the statutory demand, the Court may order that the creditor pay the costs of the application.

If the debtor does not contest the statutory demand or fails in its application to set it aside, then the debtor company will have an additional seven days to pay the debt (unless the Court extends the time for compliance with the demand). Once the time for compliance has expired, the creditor can (but is not required to) take action to wind-up the debtor company. Importantly, just because the debtor company is then presumed to be insolvent, the debtor could still defend the winding-up application, if it could prove that it was not insolvent.

Conclusion

Creditors must be aware that a creditor’s statutory demand can only be used when it is for a debt that is due and owing, over which there is no genuine dispute. Creditors must also appreciate that if a debtor wishes to buy time, then they can make a Court application to set aside the statutory demand, providing that they can satisfy the Court that they have an arguable defence to the claim.

For creditors wanting to avoid the costly and lengthy litigation route, statutory demands are ideal to place maximum pressure on debtor companies in the shortest period of time. However, given the technicalities, legal advice should be sought to ensure a maximum chance of success.

For debtors who have received a statutory demand, legal advice should immediately be sought, otherwise there may not be enough time to make the application or adequately set out the grounds, which may prejudice the debtor’s chances of successfully setting aside the statutory demand.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

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